Cross-border Portfolio Investment Research Articles

Chinese monetary policy spillovers on its international portfolio investment flows

This paper examines Chinese monetary policy spillovers on its international portfolio investment flows with a factor-augmented vector autoregression (FAVAR) model. The paper extracts a FPI factor from certain time series to measure monthly foreign portfolio investment flows (FPI). Four Chinese monetary policies are considered: central-bank target policy rate; required reserve ratio; M2; banks' loans. The robust and significant results show that interest rates and banks' loans have significant impact on Chinese international portfolio investment flows, while changes in reserve requirements are not effective. It reveals the increasingly important effects of Chinese monetary policies on its cross-border portfolio investment flows following decades' capital account openness and the reform of interest rate liberalization in China, which indicates that Chinese monetary policy is approaching to a market-based framework.

A regime-switching skew-normal model of contagion in some selected stock markets.

This study examined the contagion and structural break between Nigerian Stock Exchange Market (NSE) and some selected stock markets, namely: Ghana, South Africa (SA), Tunisia, and the United States. Two periods were considered: the crisis period (1st May 2016 to 31st December 2017) and the calm period (1st January 2018 to 31st December 2019). Following the work of (Chan, J., Fry-McKibbin, R. & Hsiao C. (2018). A Regime switching skew-normal model of contagion. Studies in Nonlinear Dynamics and Econometrics, Volume 23, Issue 1), the study used the Regime Switching Skew-Normal (RSSN) model which is capable of measuring contagion and structural breaks between markets. Our results indicated evidence of a structural break between the crisis and calm periods, which is a prerequisite for contagion. Furthermore, the study found a moderate contagion between Nigeria and SA stock markets but an absence of contagion between Nigeria and the remaining stock markets, suggesting capital flights from Nigeria to SA for safety during the 2016 economic recession. However, we were unable to find any evidence of capital reversal to Nigeria from SA during the calm period, implying an existence of an asymmetric relationship between Nigeria and South African stock markets. The absence of contagion between Nigeria and the selected African stock markets, suggests there is no significant economic cooperation and cross-border portfolio investment flow among the countries. This development further underpins the imperativeness of the full implementation of the African Continental Free Trade Agreement (AfCFTA), which encourages economic activities and investment flow on the continent.

Cross-Border Portfolio Investment Flows, Household Portfolio Choice, and Consumer Spending

Cross-Border Portfolio Investment Flows, Household Portfolio Choice, and Consumer Spending

Globalization and the Reach of Multinationals Implications for Portfolio Exposures, Capital Flows, and Home Bias

The growing use of low-tax jurisdictions as locations for firm headquarters, proliferation of offshore financing vehicles, and growing size, number, and geographic diversity of multinational firms have clouded the view of capital flows and investor exposures from standard sources such as the IMF Balance of Payments and the Coordinated Portfolio Investment Survey. We use detailed, security-level information on U.S. cross-border portfolio investment to uncover the extent of distortions in the official U.S. statistics. We find that nearly a third of U.S. cross border portfolio investment is allocated to a country different from its primary economic exposure by standard reporting conventions. About one-fourth of the stock of global cross-border portfolio investment is similarly distorted, with exposures to emerging markets likely understated by about a third. Estimates of the international exposures of U.S. investors are even larger when we distribute exposure according to the geographic distributions of firm-level sales. Our results have implications for conclusions we draw about the factors influencing capital flows, in particular those to emerging markets.

Китай на мировых рынках капитала

The article is analyzing the positions of China in global capital markets, and the factors that determine them. It shows the trends and features of attracting foreign direct investment in China, exporting Chinese capital abroad, attracting portfolio investments to China. The investment aspects of the Chinese Belt and Road Initiative and the role of Hong Kong as an international financial center are also considered. The evolution of the currency market regulation in China and the dynamics of the Yuan exchange rate, as well as the internationalizing of the Chinese currency and its use in cross-border operations are also discussed. The authors believe that the prospects for strengthening China’s position in the global capital markets will be determined by a number of circumstances, including the dynamics of the world economy, the growth rate of the Chinese economy, and the consistent liberalization of conditions for cross-border capital movement in China. The maintaining of higher growth rates of the Chinese economy in the context of the global recession and the coronavirus pandemic, as well as the ongoing liberalization of the domestic capital markets, suggest that the Chinese economy will remain attractive for foreign investors. The export of Chinese direct investment abroad will be largely determined by the dynamics of the country’s foreign trade, national restrictions on the export of capital, the implementing the Belt and Road Initiative and the position of China’s leading economic partners, primarily the United States, towards Chinese investment. At the same time, increased geopolitical and country risks will affect the geographical structure of China’s investment abroad in the direction of enhancing cooperation with Asian countries and participants of the Belt and Road Project. In the context of aggravated relations with the United States, China will make efforts to reduce dependence on the US dollar in settlements. Further steps will also be taken to internationalize the Chinese national currency and to achieve an increase in the use of RMB in payments. The lifting of restrictions on cross-border portfolio investments in the PRC is predetermined by ensuring the domestic macroeconomic stability, strengthening the financial system, low inflation, affordable credit, a stable balance of payments, and sufficient foreign exchange reserves. China’s real entry into the world’s leaders, both in the global commodity and capital markets, requires the creation of its own technological base, the transition to a new energy-saving, environmental-friendly national economic structure based on knowledge and new technologies, balancing the development levels of the country’s regions, and increasing the average per capita income of people.

An Analysis of the Effects of Corona Virus (COVID-19) on International Financial Derivatives Market, 2020

This research article develops a rational framework to comprehend the spatiotemporal structures of epidemic illness (COVID-19) incident, its applicability, and its significances to financial markets action. The article proposes a paradigm shift which is a new multidimensional geometric approach that has to apprehend all proportional and asymmetrical strategic illustrated tendencies. The epidemic impact on economic activity differs in terms of magnitude and intensity: an economy experiences a supply and demand shocks in the short-run with instant effects in output and employment. This has generated unparalleled amounts of vulnerability, which is a relatively limited amount of time that has incurred substantial risks to investors. This paper seeks to chart the general dynamics of global derivatives markets with country-specific threats and structural threats. The COVID-19 catastrophe has accelerated crucial disturbances for exchange rates and international capital cycles. Cross-border portfolio investment halted in many developing markets as well as in some progressive economies in 2020. All show that in this pandemic situation coronavirus affects financial markets and extreme volatility in the financial market. Nations have not had to utilize capital supervision. To assistance foreign currency liquidity, numerous developing markets have negotiated in the foreign exchange market and slowed down regulations on capital influxes. The globalization of financial markets is directed to the gigantic expansion of magnitude and diversification of financial trades. Finally, all sections show and describe in detail this topic and give some recommendations to overcome this situation.

A Regime Switching Skew-Normal Model of Contagion in Major African Stock Markets

This study was carried out to examine the contagion and structural break for some selected African stock markets namely: Nigeria, Ghana, South Africa (SA), Tunisia, and the US stock market. To achieve this, two periods were considered, that is the crisis period, 31st December, 2013 to 31st December, 2017 and the non-crisis period, 1st January, 2018 to 31st December, 2019. The choice of these periods was to reflect the structural break caused by economic recession in Nigeria during the crisis period. The expectation is that there is capital flight from Nigerian equities to safety in the selected emerging economies in Africa and in the US economy. Following the work of Chan et al (2018), the study used Regime Switching Skew-Normal (RSSN, henceforth) model which is capable of measuring contagion and structural breaks between markets and across crisis and non-crisis periods. The RSSN model was estimated using Bayesian method. The study finds the existence of moderate contagion between Nigeria and SA and the absence of contagion with the rest of the economies, suggesting there is capital flight from equities in Nigeria to SA for safety during the 2016 economic recession. Also, the study confirms the presence of structural break between crisis and non-crisis periods as the probability of average return declines during crisis period. The absence of contagion among African stock markets suggests there is no significant economic cooperation and cross-border portfolio investment flow among the countries. This development further underpins the imperative of the full implementation of African Continental Free Trade Area (AfCFTA), which is to encourage economic activities and investment flow on the continent.

A Review of International Risk Sharing for Policy Analysis

This paper offers a comprehensive view of international risk sharing and of related policy issues from the perspective of the European Union. The traditional analyses contemplate three risk-sharing channels: the capital markets channel (through cross border portfolio investments), international transfers and the credit markets channel (via savings). Comparative analyses reveal that, on average, about 80% of the shock remains unsmoothed in Europe while only about 18% of the shock is transmitted to consumers within the US. From aggregated figures, there is space for improving, particularly, the cross-border investments channel in Europe. In this sense, the completion of the Banking and Capital Markets Union are expected to boost risk sharing across European member states. We also review new additional issues usually not contemplated by the traditional literature as depreciation, migration and the role of sovereigns and two new additional channels recently considered in the literature: government consumption and the real exchange rate. Finally, we also examine recent analysis related to the geographic distribution of risk sharing.

A Review of International Risk Sharing for Policy Analysis

This paper offers a comprehensive view of international risk sharing and of related policy issues from the perspective of the European Union. The traditional analyses contemplate three risk-sharing channels: the capital markets channel (through cross border portfolio investments), international transfers and the credit markets channel (via savings). Comparative analyses reveal that, on average, about 80% of the shock remains unsmoothed in Europe while only about 18% of the shock is transmitted to consumers within the US. From aggregated figures, there is space for improving, particularly, the cross-border investments channel in Europe. In this sense, the completion of the Banking and Capital Markets Union are expected to boost risk sharing across European member states. We also review new additional issues usually not contemplated by the traditional literature as depreciation, migration and the role of sovereigns and two new additional channels recently considered in the literature: government consumption and the real exchange rate. Finally, we also examine recent analysis related to the geographic distribution of risk sharing.

Cross-Border Portfolio Investment and Financial Markets Development in the Asia and Pacific Region

This study examines cross-border portfolio investment in the Asia and Pacific region throughout 2001–2017, where rapid increases in investment have taken place particularly after the 2008–2009 global financial crisis. Cross-border portfolio investment in this region has the following characteristics. First, equity has been a dominant source of foreign liabilities notwithstanding efforts to develop bond markets in the region. Second, debt securities have remained dominant foreign assets held by the region. Third, the region’s assets and liabilities linkages have remained overwhelmingly strengthened against the United States and the European Union. However, the region has also witnessed greater intra-regional financial integration, centering at China with growing linkages with Hong Kong and Singapore. Fourth, Japan as a country with the largest abundant domestic capital in the region has remained predominantly exposed to the United States and the European Union. Within the region, nonetheless, debt securities issued by Australia have increasingly attracted Japan’s capital.

Home country interest rates and international investment in U.S. bonds

We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003–2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In addition to affecting overall investments, lower interest rates at home are associated with a greater weight on corporate bonds, consistent with search-for-yield. The results are economically important and robust to controlling for a number of country-specific macroeconomic and financial conditions as well as to sample restrictions and choices of interest rate. Our findings have important policy implications in that they suggest that low interest rates can lead to shifts in the volume and composition of overseas investments.

Home Country Interest Rates and International Investment in U.S. Bonds

We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003 - 2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In addition to affecting overall investments, lower interest rates at home are associated with a greater weight on corporate bonds, consistent with search- for-yield. The results are economically important and robust to controlling for a number of country-specific macroeconomic and financial conditions as well as to sample restrictions and choices of interest rate. Our findings have important policy implications in that they suggest that low interest rates can lead to shifts in the volume and composition of overseas investments.

Information Exchange and Tax Haven Investment in OECD Securities Markets

Curtailing tax evasion is high on the international policy agenda. Still, there is only little empirical evidence about the effects of offshore tax evasion in cross-border portfolio investment and its responsiveness to changes in enforcement. Exploiting rich IMF data on bilateral investments in OECD securities markets, we show that outbound portfolio investment (FPI) from tax haven countries is significantly more responsive to information exchange than outbound FPI from non-havens. This is strong evidence for a tax evasion component in tax haven investment in OECD securities markets. Furthermore, we are able to show that tax havens’ attempts to undermine the OECD transparency initiative pay off. Tax havens that enter into information exchange with other tax havens rather than with non-haven partner countries become more attractive pass-through destinations for tax evaders.

Does institutional ownership matter for international stock return comovement?

We study the link between international stock return comovements and institutional investment. We test whether the rise of institutional ownership has increased cross-country correlations and decreased cross-industry correlations. Using stock-level institutional holdings across 45 countries during the 2001–2010 period, we find that industry and global factors are relatively more important the country factors in explaining stock return variation among stocks with higher institutional ownership. Industry diversification strategies are more beneficial than country diversification strategies for stocks with high institutional ownership. We show that cross-border portfolio investment is a powerful force of international capital market integration and convergence of asset prices.

Does Institutional Ownership Matter for International Stock Return Comovement?

We study the link between international stock return comovements and institutional investment. We test the hypothesis that the rise of institutional investors as shareholders of corporations worldwide has increased cross-country correlations and decreased cross-industry correlations. Using stock-level institutional holdings across 45 countries during the period 2001-2010, we find that industry and global factors are relatively more important than country factors in explaining stock return variation among stocks with higher institutional ownership. Industry diversification strategies offer more benefits than country diversification benefits for stocks with high institutional ownership. Our findings show that cross-border portfolio investment is a powerful force of international capital markets integration and convergence of asset prices across countries.

Geography of cross-border portfolio investments and ICT diffusion

The main purpose of this study is to explore how the ease and efficiency of information transmission, facilitated by the diffusion of the Internet, may affect the cross-border financial asset trades between countries. With an extensive panel dataset of 67 source countries and 173 host countries from 2001 to 2013, it is found that the Internet diffusion leads to an increase in the bilateral FPI holdings. The magnitude of the effect increases as the level of FPI holdings approaches zero, indicating that information barrier is a stronger deterrence at the near-zero level of asset trades.

Cross Border Portfolio Investment and The Volatility of Stock Market Index and Rupiah's Rate

This paper use daily data during the period 2010-2014 to analyse the impact of foreign capital inflows on capital market volatility and on the volatility of Rupiah’s rate. The results shows the flow of foreign capital positively affect the Jakarta Composite Index (JCI) but not the rate of Rupiah. Using Vector Error Correction Model, this paper finds a cointegrated and dynamic relationship between the changes in foreign capital flow in Indonesia, with the JCI and the exchange rate of Rupiah against USD. Changes in the Rupiah’s rate significantly affect the foreign capital flow and the JCI, while the JCI does not significantly affect the flow of foreign capital and the changes of Rupiah’s rate.

Drivers of Financial Integration – Implications for Asia

Deeper intraregional financial integration is prominent on Asian policymakers’ agenda. This paper takes stock of Asia’s progress toward that objective, analyzing recent trends in cross-border portfolio investment and bank claims. Then, it investigates the drivers of financial integration by estimating a gravity model of bilateral financial asset holdings on a large sample of source and destination countries worldwide, focusing in particular on the role of regulation and institutions. The paper concludes that financial integration in Asia could be enhanced through policies that lower informational frictions, continue to buttress trade integration and capital market development, remove restrictions to foreign flows and bank penetration, and promote a common regulatory framework.

Do Democracies Attract Portfolio Investment? Transnational Portfolio Investments Modeled as Dynamic Network

For many, transnational capital is an important driving force of economic globalization. However, we know little about the political determinants for cross-border portfolio investments. Recent economic literature focuses upon information asymmetries. We move beyond this and introduce an explicitly political element into the study of international asset flows. Democratic institutions attract portfolio investments because they reduce the chances of government predatory practices. Applying a dynamic latent space model on the bilateral portfolio investment data from 2001 to 2005, we empirically examine the effects of important country-level characteristics of both exporters and importers of portfolio investments. The empirical findings suggest that democracies are often associated with higher levels of inward portfolio investments. Interestingly, we also find that portfolio investments are associated with business communities’ subjective estimate of property rights protection, but not with more comprehensive, index-based aggregate measures from international think tanks.

Cross-border portfolio investment networks and indicators for financial crises.

Cross-border equity and long-term debt securities portfolio investment networks are analysed from 2002 to 2012, covering the 2008 global financial crisis. They serve as network-proxies for measuring the robustness of the global financial system and the interdependence of financial markets, respectively. Two early-warning indicators for financial crises are identified: First, the algebraic connectivity of the equity securities network, as a measure for structural robustness, drops close to zero already in 2005, while there is an over-representation of high-degree off-shore financial centres among the countries most-related to this observation, suggesting an investigation of such nodes with respect to the structural stability of the global financial system. Second, using a phenomenological model, the edge density of the debt securities network is found to describe, and even forecast, the proliferation of several over-the-counter-traded financial derivatives, most prominently credit default swaps, enabling one to detect potentially dangerous levels of market interdependence and systemic risk.